A debt mutual fund scheme under Section 80C likely in budget 2018

By Madhu T

The budget might have a new mutual fund scheme for you. According to two people familiar with the development, the finance minister may introduce a debt mutual fund scheme in the budget that qualifies for a tax deduction under Section 80C of the Income Tax Act.

“We are quite hopeful that we will get a debt scheme that will qualify for tax deductions like an ELSS,” said a senior mutual fund official who refused to be named. “The talks have been going on for some time. It seems, the government is okay with the product,” says another mutual fund industry participant.

Currently, an Equity Linked Savings scheme or ELSS is the only mutual fund scheme that qualifies for tax deductions of up to Rs 1.5 lakh under Section 80C of the Income Tax Act. However, an ELSS invests mostly in stocks, making it unsuitable for conservative investors who do not want to take any risk. Mutual fund industry has been pleading with the government in the last two years that a new debt scheme would address the concern of the conservative investors.

According to the mutual fund official quoted earlier, the new scheme would be a medium-term debt scheme, and it will have a mandatory lock-in period of three years.

Every investment option permitted under Section 80C comes with a mandatory lock-in period. For example, an ELSS come with a mandatory lock-in period of three years, whereas a National Savings Certificate (NSC) has a lock-in period of five years. Public Provident Fund (PPF) is a 15-year product, though it allows investors to take loans after the third year.

Unlike an ELSS, the new debt scheme will not qualify for tax-free returns. Equity mutual fund investments held over a year qualify for long-term capital gains tax which is nil now. Since ELSSs come with a lock-in period of three years, they qualify for zero capital gains tax on returns.

However, debt mutual funds are taxed differently. Debt funds held over three years qualify for long-term capital gains tax of 20 per cent with the indexation benefit. According to mutual fund advisors, this translates into an effective tax rate of 5-6 per cent in the current scenario. The indexation helps to bring down taxes in an inflationary scenario.

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Via:: Economic times – Wealth


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